2023 Long-Term Capital Market Assumptions - Invesco
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1 2023 Long-Term Capital Market Assumptions Invesco Investment Solutions I Pound Sterling (GBP) I Q2 Update The document is intended only for Professional Clients in Continental Europe (as defined under Important Information); for Professional Clients in Dubai, Ireland, the Isle of Man, Jersey and Guernsey, and the UK; for Sophisticated or Professional Investors in Australia; for wholesale investors (as defined in the Financial Markets Conduct Act) in New Zealand, for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan; for Qualified Institutional Investors and/or certain specific institutional investors in Thailand, for certain specific institutional investors in Indonesia and for qualified buyers in Philippines for informational purposes only;for Institutional Investors and/or Accredited Investors in Singapore; for certain specific Qualified Institutions/Sophisticated Investors only in Taiwan and for Institutional Investors in the USA. The document is intended only for accredited investors as defined under National Instrument 45-106 in Canada. It is not intended for and should not be distributed to or relied upon by the public or retail investors.
2
1
• While our team at Invesco Investment Solutions (IIS) is critically aware of the
potential damage a recession can have on the economy, markets, and portfolios,
we aim to invest through multiple business cycles with the understanding that
the risk of a recession is one of many risks that a portfolio is exposed to over the
long term. Cash is often not the answer over our time horizon.
• We are by no means calling for a recession, however given the very real
probability assigned to one by credible market participants, we would like to use
this note to explain how a recession could impact capital market assumptions
(CMAs). By utilizing our building block framework, we can dissect some of the
implications of a negative growth shock in a forward-looking lens.
Executive • Compared to a global 60/40 benchmark, our strategic portfolio (5-10Y) is slightly
overweight fixed income relative to equities. Overall, our portfolio has not shifted
Summary significantly into or out of any asset classes this quarter.
Figure 1: Expectations relative to historical average (GBP)
Fixed Income 10-year CMA Equities 10-year CMA
Alternatives 10-year CMA Historical 10-year return
Within asset class, relative to history:
Lower Higher
expected expected
returns returns
20
Return (Geometric) %
15
10
Alessio de Longis, CFA
Senior Portfolio Manager, 5
Head of Investments, 0
Invesco Investment Solutions
-5
China RMB Credit
China Policy Bk & Tsy
US Muni
US IG Corp
US TIPS
US HY Corps
US Agg
US Tsy
US MBS
EM Agg
Global Agg
Global Agg ex-US
US Broadly Synd. Loans
US Large Cap
US Mid Cap
Global Equity
Japan Equity
Europe Equity
EAFE Equity
US Small Cap
Canada Equity
UK Large Cap
China Large Cap
APAC ex-JP
EM Equity
HFRI Hedge Funds
US REITs
Global Infra
Global REITs
GS Commodities
Invesco Investment Solutions
provides forecasts for 170+ assets
in over 20 currencies, including Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-
10 private assets. For additional CMA looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 9 for
data, views, or analysis, please reach information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions,
the views of other investment teams at Invesco may differ from those presented here.
out to your Invesco representative.
Executive Summary
Asset Allocation Insights
2023 Capital Market Assumptions
(Q2 Update)
3
2
Strategic perspective
“The recession has yet to arrive” is not as catchy a headline as many that have
filled financial media as of late. Nearly halfway through 2023, a multitude of
professional forecasters are assigning a probability of recession over the next year
at well over 50%1 (and it should be noted that many have been for the past year as
well). Investors have been left waiting for an economic collapse, preparing their
proverbial bunkers by raising cash balances and accepting a negative real return
to hedge this growth risk. Meanwhile, global equities have outperformed both
cash and gold year to date2. While our team at Invesco Investment Solutions (IIS)
Asset Allocation is critically aware of the potential damage a recession can have on the economy,
markets, and portfolios, we aim to invest through multiple business cycles with the
Insights understanding that the risk of a recession is one of many risks that a portfolio is
exposed to over the long term. Cash is often not the answer over our time horizon.
We are by no means calling for a recession, however given the very real probability
assigned to one by credible market participants, we would like to use this note
to explain how a recession could impact capital market assumptions (CMAs).
By utilizing our building block framework, we can dissect some of the implications
of a negative growth shock in a forward-looking lens:
1. R
ecessions mostly impact the returns of equities by lowering their expected
levels of growth in the near term and on average recessions lower earnings by
around 30% 3. It takes time for an economy to recover to average trend earnings
growth as unemployment and bankruptcies mount, thus slowing sales relative to
costs. It is clear that equity prices fall as recession risks rise. Equity assets that
are more growth sensitive, like small caps and Emerging Markets tend to fall the
Scott Hixon, CFA most in these periods.
Senior Portfolio Manager,
2. In response to the downward pressure on both price and earnings, valuations
Head of Research,
also fall, reverting to lower, more attractive levels, where additional capital
Invesco Global Asset Allocation
invested purchases more of a company’s earnings than it did prior to the
recession. Valuations are a key predictor of forward-looking returns over
the long run and lower multiples tend to be positive for prices 5-to-10 years
in the future. This compression is most evident in high growth sectors
which command high multiples pre-recession. Dividend yields also rise as
the denominator falls, paying out more to shareholders and incentivizing
investment.
3. A
long with growth rates, inflation tends to fall as well. Nominal rates of return
converge with real returns, lowering the hurdle for investing in general. Many
argue what is the root cause of inflation, however it is well accepted that
slowing an economy (often with the lagged effects of interest rate hikes) also
slows inflation.
Marc Shmerling, CFA 4. Y
ields fall across the curve, mostly on the short end as base rates are lowered
Director, Investment Research to stimulate the economy, boosting long duration bond prices. The fall in yields
Invesco Investment Solutions does unfortunately reduce forward returns for fixed income investments,
particularly floating rate instruments. It is here that the desired negative
correlation between fixed income and equities becomes more acute. The yield
curve steepens and often un-inverts, becoming a healthier shape where roll
For further details on our process for yield is positive.
defining scenarios and adjustments, 5. C
redit spreads start to widen prior to a recession and accelerate within the first
please refer to our CMA Methodology half of a recession, often predicting a wave of defaults. As stimulus is made
paper. more readily available, credit spreads tighten, reducing the expected returns of
below-investment-grade fixed income. Lending standards are then loosened to
entice risk taking as capital becomes cheaper and the likelihood of repayment is
higher.
6. “ Safe haven” currencies like the US Dollar, Euro, and Yen, increase in value
relative to more cyclical currencies like the Yuan, Australian Dollar, or
Canadian Dollar. Our framework for currency investing looks beyond near-term
Executive Summary
dislocations and focuses on interest rate parity.
Asset Allocation Insights 1
Recession models for the next 12 months from the Conference Board are at a 99% probability, the Cleveland
Fed at 80%, Bloomberg Economics at 80%, consensus forecasts at 65%, as of May 30, 2023.
2023 Capital Market Assumptions
2
Bloomberg, as of May 30, 2023.
3
NBER, Bloomberg, as of May 30, 2023.
(Q2 Update)4
Figure 2: Historical returns for the 60/40 have fallen amid recent selloff while expected
returns are improving (GBP)
20 Return(%) Risk(%)
Historical 60/40 10.3 9.2
Expected 60/40 5.9 12.8
15 US Large Cap
Return (%)
Moderate Portfolio Global Equity
10
EAFE Equity EM Equity
Global Equity
US Large Cap
Moderate Portfolio EAFE Equity
5 EM Equity
US Agg
US Agg
Global Agg
Global Agg
0
0 5 10 15 20 25 30
Risk (%)
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-
looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 9 for
information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions,
the views of other investment teams at Invesco may differ from those presented here. The 60/40 Portfolio is a
blend of 60% S&P 500 Index and 40% Bloomberg Barclays US Aggregate Index.
2Q23 CMA Observations (10Y, USD):
Equities: US and global equities are expected to return around 7% with slightly
lower expected returns in Europe (6.3%) and higher returns in Emerging Markets
(EM) (9%). Most equity CMAs were lower this quarter (-0.3% for global equities)
due to higher valuations from the Q1 rebound in market prices. EU and Japan fell
more than average while small caps and EM fell less. Inflation was mostly flat as a
contributor, with China being an exception as expected inflation rose 0.4%.
Fixed Income: All CMAs for fixed income assets are projected to be above the
past 10 years of historical return. Global aggregate bonds are expected to return
about 4%, in line with Treasuries, with longer duration fixed income expected to
underperform shorter duration as many regional yield curves are inverted. Broadly
syndicated loans are expected to return around 9.2% with a risk/return ratio of 1.15,
one of the highest returning CMAs among the universe of assets we cover with
relatively low expected risk. Loans are significantly more attractive in our framework
than high yield which has a 6.7% return and 0.7 risk return ratio. Fixed income
CMAs are mostly lower than last quarter outside of HY munis with lower average
(of current and expected) yields. Loans fell less (0.1%) than other fixed income
assets (~0.3%). Investment grade corporate bonds only provide a slight premium to
Treasuries with a slightly higher level of risk.
Alternatives: Unlevered core real estate’s CMA has risen this quarter (+0.6%) to
7.5% as expected valuations have improved as 10Y yields have fallen slightly relative
to cap rates. There has also been a rebound for listed US REITS (+0.8%) from higher
expected real earnings. Private equity has fallen in line with global equities (-0.3%)
to 12.05% IRR mostly due to lower expected growth.5
The strategic asset allocation (SAA) Strategic Asset Allocation Trends:
displayed here is denominated in
USD and is representative of our Figure 3: 2023 Q2 SAA Rebalance (USD)
CMA's applied in a hypothetical
portfolio context for global
investors. EM Agg.
2.4%
US Brd. Synd. Loans
There are many considerations for US HY 2.8%
investors beyond CMA's when it 7.4%
comes to asset allocation decisions.
To learn more about our investment US MBS
process or discuss your own 7.1%
portfolio needs, please reach out to
your Invesco Investment Solutions US Corp. US
representative. 7.4% Equities
38.2%
US Tsy. Long
6.7%
EM EAFE
US Tsy. Short Equities Equities
8.5% 8.5% 11.0%
Equities Fixed Income
0.5
QoQ Change (%)
0.0
-0.5
-1.0
US Tsy. Long
US Corp.
EM Agg.
US MBS
US Equities
EAFE Equities
EM Equities
US Tsy. Short
US Brd.
Synd. Loans
US HY
Source: Invesco Investment Solutions, as of March 31, 2023. Proxies listed in Figure 8. These estimates
reflect the views of Invesco Investment Solutions, the views of other investment teams at Invesco may differ
from those presented here. References to overweights and underweights are relative to a 60% global equity
and 40% global aggregate fixed income benchmark.
• Portfolio level: Compared to a global 60/40 benchmark, our strategic portfolio
(5-10Y) is slightly overweight fixed income relative to equities. Overall, our
portfolio has not shifted significantly into or out of any asset classes this quarter.
• Within equities: We are overweight EM and US large cap equities while
underweight DM ex-US equities due to a lower expected risk/return ratio.
• Within fixed income: Presently overweight both treasuries and risky credit.
Neutral duration compared to our benchmark.6
3
Figure 4: 10-year asset class expectations (GBP)
Fixed income Equities Alternatives
15
Expected arithmetic returns %
US Large Cap Global REITs
China Large Cap
UK Large Cap US Mid Cap
Europe Equity US Small Cap
Global Equity EM Equity
Global Infra APAC ex-JP
10 US Broadly Synd. Loans GS Commodities
US REITs
EM Agg
US HY Corps
2023
Japan Equity
US IG Corp Canada Equity
China Policy Bk & Tsy EAFE Equity
Capital Market 5
China RMB Credit
US TIPS
HFRI Hedge Funds
US MBS
Assumptions Global Agg
Global Agg ex-US
US Tsy
US Agg
US Muni
0
0 5 10 15 20 25 30 35 40
Expected risk %
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-
looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 9 for
information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions,
the views of other investment teams at Invesco may differ from those presented here. Performance, whether
actual or simulated, does not guarantee future results.
Figure 5: CMA difference: 5-year minus 10-year assumptions (GBP)
Fixed income Equities Alternatives
US IG Corp
US Muni
US TIPS
US HY Corps
Global Agg
US Agg
China RMB Credit
US Tsy
EM Agg
Global Agg ex-US
US MBS
China Policy Bk & Tsy
US Broadly Synd. Loans
Japan Equity
UK Large Cap
EAFE Equity
Canada Equity
Europe Equity
Global Equity
US Large Cap
US Mid Cap
EM Equity
China Large Cap
APAC ex-JP
US Small Cap
Global REITs
HFRI Hedge Funds
US REITs
Global Infra
GS Commodities
Return
Within asset class, higher expected:
(Geometric) 5-year
10-year
% returns returns
4
3
2
1
0
-1
-2
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-
looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 9 for
information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions,
the views of other investment teams at Invesco may differ from those presented here. Performance, whether
actual or simulated, does not guarantee future results.
Executive Summary
Asset Allocation Insights
2023 Capital Market Assumptions
(Q2 Update)7
Figure 6a: Equity CMA building block contribution (GBP) (%)
Expected Return
Global Equity
Global ex-US Equity
US Large Cap
US Small Cap
EAFE Equity
Europe Equity
UK Equity
Canada Equity
Japan Equity
EM Equity
Dividend Buyback LT Earnings Expected Valuation Currency Adj.
Yield Yield Growth Inflation Change (IRP)
Global Equity 2.21 0.74 1.76 2.10 -0.24 0.35
Global ex-US Equity 3.17 0.00 1.70 1.78 -0.60 0.86
Expected US Large Cap 1.59 1.23 1.80 2.31 0.00 0.03
return
(%) US Small Cap 1.56 0.81 3.15 2.31 1.08 0.03
10.0 EAFE Equity 3.20 0.00 1.22 1.44 -0.96 1.33
Europe Equity 3.26 0.00 1.18 1.92 -1.01 0.93
8.0
UK Equity 4.01 0.00 1.46 2.25 -0.95 0.00
6.0
Canada Equity 2.96 0.00 1.33 2.00 -0.91 0.64
4.0
Japan Equity 2.52 0.00 1.16 -0.56 -0.90 3.20
2.0
EM Equity 3.17 0.00 2.92 2.53 0.31 -0.19
0.0
Figure 6b: Equity CMA building block quarter-over-quarter change and contribution (GBP) (%)
Global Equity
Global ex-US Equity
US Large Cap
US Small Cap
EAFE Equity
Europe Equity
UK Equity
Canada Equity
Japan Equity
EM Equity
Dividend Buyback LT Earnings Expected Valuation Currency Adj.
Yield Yield Growth Inflation Change (IRP)
Global Equity -0.03 -0.01 -0.06 0.04 -0.22 0.20
Global ex-US Equity 0.04 0.00 -0.07 0.04 -0.36 0.14
QoQ US Large Cap -0.07 -0.02 -0.06 0.03 -0.13 0.24
change
(%) US Small Cap 0.03 0.02 -0.04 0.03 -0.20 0.24
0.2 EAFE Equity 0.06 0.00 -0.07 0.02 -0.46 0.09
Europe Equity 0.11 0.00 -0.05 0.01 -0.57 0.07
0.0
UK Equity 0.19 0.00 -0.05 0.05 -0.08 0.00
-0.2 Canada Equity 0.03 0.00 -0.13 0.02 -0.20 0.28
-0.4 Japan Equity -0.07 0.00 -0.06 -0.03 -0.33 -0.04
EM Equity -0.01 0.00 0.00 0.11 -0.14 0.16
-0.6
Figure 6c: Equity CMA building block year-over-year change and contribution (GBP) (%)
Global Equity
Global ex-US Equity
US Large Cap
US Small Cap
EAFE Equity
Europe Equity
UK Equity
Canada Equity
Japan Equity
EM Equity
Dividend Buyback LT Earnings Expected Valuation Currency Adj.
Yield Yield Growth Inflation Change (IRP)
Global Equity 0.05 -0.01 -0.31 -0.13 -0.47 0.75
Global ex-US Equity 0.14 0.00 -0.40 -0.24 -0.62 0.84
YoY US Large Cap -0.01 -0.02 -0.25 -0.07 -0.37 0.70
change
(%) US Small Cap 0.10 0.00 -0.34 -0.07 -0.57 0.70
0.5 EAFE Equity 0.04 0.00 -0.32 -0.10 -0.71 0.56
Europe Equity 0.02 0.00 -0.37 -0.11 -0.82 0.23
0.0
UK Equity 0.02 0.00 -0.51 -0.27 -0.39 0.00
-0.5 Canada Equity 0.24 0.00 -0.61 -0.07 -0.70 1.55
-1.0 Japan Equity 0.03 0.00 -0.13 -0.20 -0.46 1.12
EM Equity 0.31 0.00 -0.39 -0.47 -0.33 1.12
-1.5
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-looking, are not guarantees, and they involve risks, uncertainties,
and assumptions. Please see page 9 for information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions, the views of other
investment teams at Invesco may differ from those presented here. Performance, whether actual or simulated, does not guarantee future results.8
Figure 7a: Fixed CMA building block contribution (GBP) (%)
Expected Return
US Tsy
US TIPS
US Broadly Synd. Loans
US Agg
US MBS
US HY Corps
EM Agg
EM Agg Sov
EM Agg Corp
EM Local Debt
Average Roll Valuation Change Valuation Credit Currency
Yield Return (Yield Curve) Change (OAS) Loss Adj. (IRP)
US Tsy 3.96 -0.01 -0.15 0.00 0.00 0.03
US TIPS 4.05 0.00 -0.12 0.00 0.00 0.03
Expected US Broadly Synd. Loans 9.98 0.00 0.03 0.19 -0.98 0.03
return
(%) US Agg 4.53 -0.01 -0.15 -0.01 -0.23 0.03
10.0 US MBS 4.52 -0.01 -0.15 0.14 0.00 0.03
US HY Corps 8.79 -0.14 -0.02 -0.20 -1.78 0.03
8.0
EM Agg 7.46 -0.01 -0.15 0.03 -1.43 0.03
6.0
EM Agg Sov 7.57 0.05 -0.32 0.42 -1.19 0.03
4.0
EM Agg Corp 7.84 -0.10 -0.08 -0.12 -1.65 0.03
2.0
EM Local Debt 7.03 0.33 -0.45 0.00 0.00 -0.36
0.0
Figure 7b: Fixed CMA building block quarter-over-quarter change and contribution (GBP) (%)
US Tsy
US TIPS
US Broadly Synd. Loans
US Agg
US MBS
US HY Corps
EM Agg
EM Agg Sov
EM Agg Corp
EM Local Debt
Average Roll Valuation Change Valuation Credit Currency
Yield Return (Yield Curve) Change (OAS) Loss Adj. (IRP)
US Tsy -0.36 -0.07 0.02 0.00 0.00 0.24
US TIPS -0.42 -0.03 0.10 0.00 0.00 0.24
QoQ US Broadly Synd. Loans -0.01 0.00 0.01 -0.12 0.01 0.24
change
(%) US Agg -0.33 -0.07 0.02 0.04 -0.02 0.24
0.3 US MBS -0.27 -0.07 0.02 0.07 0.00 0.24
US HY Corps -0.37 -0.03 0.00 -0.05 0.01 0.24
0.0 EM Agg -0.27 -0.07 0.02 0.12 -0.08 0.24
EM Agg Sov -0.23 -0.02 0.06 0.20 -0.02 0.24
-0.3
EM Agg Corp -0.35 -0.01 0.01 0.01 0.00 0.24
EM Local Debt -0.16 -0.18 -0.12 0.00 0.00 0.02
-0.6
Figure 7c: Fixed CMA building block year-over-year change and contribution (GBP) (%)
US Tsy
US TIPS
US Broadly Synd. Loans
US Agg
US MBS
US HY Corps
EM Agg
EM Agg Sov
EM Agg Corp
EM Local Debt
Average Roll Valuation Change Valuation Credit Currency
Yield Return (Yield Curve) Change (OAS) Loss Adj. (IRP)
US Tsy 0.62 -0.24 0.14 0.00 0.00 0.70
US TIPS 0.51 -0.20 0.28 0.00 0.00 0.70
YoY US Broadly Synd. Loans 1.72 0.00 0.06 -0.10 -0.04 0.70
change
(%) US Agg 0.53 -0.25 0.23 0.01 -0.01 0.70
3.0 US MBS 0.54 -0.24 0.14 0.10 0.00 0.70
US HY Corps -0.01 -0.29 0.21 -0.45 -0.08 0.70
1.5 EM Agg 0.32 -0.24 0.14 -0.30 -0.11 0.70
EM Agg Sov 0.20 -0.06 0.20 -0.51 0.05 0.70
0.0
EM Agg Corp 0.23 -0.24 0.14 -0.43 0.08 0.70
EM Local Debt -0.41 -0.28 -0.07 0.00 0.00 -0.56
-1.5
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-looking, are not guarantees, and they involve risks, uncertainties,
and assumptions. Please see page 9 for information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions, the views of other
investment teams at Invesco may differ from those presented here. Performance, whether actual or simulated, does not guarantee future results.9
Figure 8: 10-year asset class expected returns, risk, and return-to-risk (GBP)
Expected Expected Arithmetic
geometric arithmetic Total Expected return
return return Yield risk to risk
Asset class Index % % % % ratio
US Tsy Short BBG US Tsy Short 4.2 4.7 4.8 10.0 0.47
US Tsy IM BBG US Tsy IM 3.7 4.3 3.9 11.0 0.39
US Tsy Long BBG US Tsy Long 3.1 4.3 3.8 15.8 0.27
US TIPS BBG US TIPS 4.0 4.4 4.0 9.4 0.47
US Broadly Synd. Loans CSFB Leverage Loan 9.3 9.8 10.8 11.1 0.89
US Agg BBG US Agg 4.2 4.8 4.4 11.2 0.42
US IG Corp BBG US IG 4.5 5.1 5.2 11.6 0.44
US MBS BBG US MBS 4.5 5.2 4.5 11.9 0.44
US Preferred Stocks BOA ML Fixed Rate Pref Securities 5.2 6.2 7.0 14.9 0.42
US HY Corps BBG US HY 6.7 7.4 8.6 12.9 0.58
US Muni BOA ML US Muni 3.3 3.9 3.4 10.7 0.36
Fixed income
US Muni (Taxable) ICE BOA US Taxable Muni Securities Plus 4.3 5.0 4.9 11.9 0.42
Global Agg BBG Global Agg 4.0 4.5 4.3 9.8 0.46
Global Agg ex-US BBG Global Agg ex-US 4.0 4.5 4.3 10.0 0.45
Global Tsy BBG Global Tsy 4.0 4.5 4.0 11.0 0.41
Global Sov BBG Global Sov 4.1 4.6 4.8 9.7 0.47
Global Corp BBG Global Corp 4.6 4.9 5.3 8.7 0.57
Global IG BBG Global Corp IG 4.6 4.9 5.4 8.7 0.57
Eurozone Corp BBG Euro Agg Credit Corp 4.5 4.9 5.4 9.2 0.54
Eurozone Tsy BBG Euro Agg Gov Tsy 4.2 4.7 4.2 10.6 0.45
Asian Dollar IG BOA ML AC IG 4.8 5.6 5.6 13.0 0.43
Asian Dollar HY BOA ML AC HY 10.4 11.8 12.6 18.1 0.65
EM Agg BBG EM Agg 5.9 7.0 7.4 15.6 0.45
EM Agg IG BBG EM USD Agg IG 4.4 5.2 5.3 12.9 0.40
China Policy Bk & Tsy BBG China PB Tsy TR 4.0 4.5 3.4 10.8 0.42
China RMB Credit BBG China Corporate 4.1 4.6 4.0 10.4 0.44
Global Equity MSCI ACWI 7.0 8.2 3.3 16.5 0.50
Global ex-US Equity MSCI ACWI ex-US 6.9 8.3 4.0 17.4 0.48
US Broad Market Russell 3000 7.2 8.7 2.9 18.6 0.47
US Large Cap S&P 500 7.0 8.4 2.8 18.0 0.47
US Mid Cap Russell Midcap 7.6 9.4 2.9 20.5 0.46
US Small Cap Russell 2000 9.0 11.5 2.4 24.1 0.48
EAFE Equity MSCI EAFE 6.2 7.6 4.5 17.3 0.44
Equities
Europe Equity MSCI Europe 6.3 7.6 4.2 16.8 0.45
Eurozone Equity MSCI Euro ex-UK 6.1 7.7 4.2 18.3 0.42
UK Large Cap FTSE 100 6.3 7.7 4.1 17.4 0.44
UK Small Cap FTSE Small Cap UK 8.2 10.4 3.6 22.8 0.46
Canada Equity S&P TSX 6.0 7.9 3.6 20.0 0.39
Japan Equity MSCI JP 5.4 7.7 5.7 22.5 0.34
EM Equity MSCI EM 8.8 11.5 3.0 25.1 0.46
APAC ex-JP MSCI APXJ 8.1 10.8 2.7 24.9 0.43
China Large Cap CSI 300 9.3 14.5 3.0 35.8 0.41
US REITs FTSE NAREIT Equity 7.3 9.3 4.1 21.2 0.44
Global REITs FTSE EPRA/NAREIT Developed 7.2 8.7 4.8 18.8 0.47
Alternatives
HFRI Hedge Funds HFRI HF 4.9 5.6 - 12.3 0.46
GS Commodities S&P GSCI 8.9 11.2 - 22.8 0.49
Agriculture S&P GSCI Agriculture 4.5 6.7 - 21.9 0.31
Energy S&P GSCI Energy 11.5 16.7 - 36.0 0.46
Industrial Metals S&P GSCI Industrial Metals 8.4 10.4 - 21.8 0.48
Precious Metals S&P GSCI Precious Metals 6.3 7.9 - 18.6 0.42
Source: Invesco, estimates as of March 31, 2023. These estimates are forward-looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please
see page 9 for information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions, the views of other investment teams at
Invesco may differ from those presented here. Agg = Aggregate, Infra = Infrastructure, Corp = Corporate, DJ = Dow Jones, HY = High Yield, Muni = Municipals,
Tsy = Treasury, IM = Intermediate, ML = Merrill Lynch, Sov = Sovereign, EM = Emerging Markets, IG = Investment Grade, APAC = Asia Pacific, Gov = Government,
MBS = Mortgage Backed Securities, TIPS = Treasury Inflation Protected Securities.10
Figure 9: 10-year correlations (GBP)
Fixed income Equities Alternatives
Greater than 0.70
US Broadly Synd. Loans
0.30 to 0.70
HFRI Hedge Funds
China RMB Credit
Global Agg ex-US
Less than 0.30
GS Commodities
China Large Cap
Canada Equity
US Large Cap
UK Large Cap
US Small Cap
Global Equity
US HY Corps
Japan Equity
Global REITs
EAFE Equity
US Mid Cap
US HY Muni
Global Infra
Global Agg
US IG Corp
EM Equity
US Tsy IM
US Muni
US TIPS
EM Agg
US Agg
Asset class
US Tsy IM 1.00
US TIPS 0.68 1.00
US Broadly Synd. Loans -0.28 0.27 1.00
US Agg 0.88 0.79 0.09 1.00
US IG Corp
Fixed income
0.59 0.75 0.44 0.88 1.00
US HY Corps 0.01 0.49 0.82 0.39 0.67 1.00
US Muni 0.59 0.63 0.30 0.78 0.76 0.48 1.00
US HY Muni 0.32 0.53 0.56 0.57 0.65 0.57 0.82 1.00
Global Agg 0.70 0.75 0.18 0.84 0.80 0.49 0.65 0.50 1.00
Global Agg ex-US 0.57 0.67 0.20 0.71 0.70 0.49 0.55 0.43 0.98 1.00
EM Agg 0.31 0.64 0.62 0.63 0.81 0.81 0.63 0.64 0.69 0.65 1.00
China RMB Credit 0.28 0.28 0.10 0.36 0.32 0.19 0.27 0.24 0.46 0.47 0.29 1.00
Global Equity -0.04 0.39 0.63 0.29 0.54 0.81 0.32 0.40 0.49 0.52 0.69 0.27 1.00
China Large Cap 0.00 0.15 0.28 0.18 0.30 0.34 0.15 0.22 0.28 0.29 0.38 0.31 0.44 1.00
US Large Cap -0.05 0.36 0.59 0.26 0.49 0.76 0.28 0.35 0.41 0.43 0.60 0.22 0.97 0.36 1.00
US Mid Cap -0.10 0.35 0.68 0.23 0.50 0.81 0.29 0.39 0.38 0.40 0.64 0.22 0.95 0.36 0.96 1.00
Equities
US Small Cap -0.16 0.25 0.62 0.13 0.39 0.74 0.19 0.30 0.28 0.31 0.53 0.19 0.87 0.34 0.89 0.95 1.00
EAFE Equity -0.02 0.36 0.60 0.28 0.53 0.78 0.33 0.40 0.52 0.56 0.70 0.28 0.96 0.43 0.87 0.87 0.79 1.00
UK Large Cap -0.11 0.30 0.61 0.19 0.45 0.73 0.28 0.39 0.43 0.49 0.63 0.25 0.91 0.40 0.83 0.82 0.75 0.95 1.00
Canada Equity -0.09 0.38 0.66 0.22 0.50 0.77 0.27 0.40 0.44 0.48 0.66 0.24 0.89 0.41 0.84 0.87 0.80 0.85 0.85 1.00
Japan Equity 0.03 0.32 0.48 0.28 0.47 0.63 0.29 0.32 0.42 0.44 0.58 0.29 0.79 0.36 0.71 0.70 0.66 0.83 0.71 0.65 1.00
EM Equity 0.00 0.37 0.58 0.30 0.53 0.72 0.32 0.42 0.53 0.57 0.74 0.37 0.85 0.57 0.72 0.74 0.68 0.84 0.78 0.81 0.69 1.00
Global REITs 0.06 0.48 0.64 0.39 0.61 0.79 0.41 0.50 0.53 0.54 0.72 0.26 0.86 0.32 0.81 0.85 0.77 0.84 0.79 0.79 0.67 0.74 1.00
Alternatives
Global Infra 0.10 0.49 0.59 0.40 0.60 0.75 0.44 0.49 0.55 0.56 0.70 0.22 0.84 0.32 0.80 0.80 0.68 0.82 0.81 0.82 0.63 0.73 0.84 1.00
GS Commodities -0.29 0.14 0.52 -0.12 0.11 0.47 0.01 0.23 0.13 0.21 0.33 0.10 0.51 0.16 0.44 0.49 0.46 0.52 0.61 0.65 0.36 0.48 0.41 0.50 1.00
HFRI Hedge Funds -0.18 0.32 0.73 0.16 0.48 0.78 0.26 0.44 0.37 0.41 0.64 0.26 0.89 0.46 0.83 0.88 0.85 0.86 0.83 0.88 0.70 0.82 0.77 0.74 0.62 1.00
Source: Invesco, estimates as of March 31, 2023. Proxies listed in Figure 8. These estimates are forward-looking, are not guarantees, and they involve risks, uncertainties,
and assumptions. Please see page 9 for information about our CMA methodology. These estimates reflect the views of Invesco Investment Solutions, the views of other
investment teams at Invesco may differ from those presented here.11
About our capital market Figure 10: Our building block approach to estimating returns
assumptions methodology
Income Capital gain Loss
We employ a fundamentally based
“building block” approach to Equity Fixed income
estimating asset class returns. Expected
Total yield Total yield
Estimates for income and capital returns
gain components of returns for + Valuation change + Valuation change
each asset class are informed by
fundamental and historical data. + Earnings growth + Roll return
Components are then combined
– Credit loss
to establish estimated returns
(Figure 10). Here we provide a For illustrative purposes only.
summary of key elements of the
methodology used to produce Fixed income returns are composed of:
our long-term (10‑year) estimates.
Five-year assumptions are also • Average yield: The average of the starting (initial) yield and the expected yield for
available upon request. Please see bonds.
Invesco’s capital market assumption • Valuation change (yield curve): Estimated changes in valuation given changes in
methodology whitepaper for more the Treasury yield curve.
detail.
• Roll return: Reflects the impact on the price of bonds that are held over time.
Given a positively sloped yield curve, a bond’s price will be positively impacted as
interest payments remain fixed but time to maturity decreases.
• Credit adjustment: Estimated potential impact on returns from credit rating
downgrades and defaults.
Equity returns are composed of:
• Dividend yield: Dividend per share divided by price per share.
• Buyback yield: Percentage change in shares outstanding resulting from
companies buying back or issuing shares.
• Valuation change: The expected change in value given the current Price/Earnings
(P/E) ratio and the assumption of reversion to the long-term average P/E ratio.
• Long-term (LT) earnings growth: The estimated rate in the growth of earnings
based on the long-term average real GDP per capita and inflation.
Currency adjustments are based on the theory of Interest Rate Parity (IRP) which
suggests a strong relationship between interest rates and the spot and forward
exchange rates between two given currencies. Interest rate parity theory assumes
that no arbitrage opportunities exist in foreign exchange markets. It is based on the
notion that, over the long term, investors will be indifferent between varying rate of
returns on deposits in different currencies because any excess return on deposits
will be offset by changes in the relative value of currencies.
Volatility estimates for the different asset classes, we use rolling historical quarterly
returns of various market benchmarks. Given that benchmarks have differing histories
within and across asset classes, we normalise the volatility estimates of shorter-lived
benchmarks to ensure that all series are measured over similar time periods.
Correlation estimates are calculated using trailing 20 years of monthly returns.
Given that recent asset class correlations could have a more meaningful effect
on future observations, we place greater weight on more recent observations by
applying a 10-year half-life to the time series in our calculation.
Arithmetic versus geometric returns. Our building block methodology produces
estimates of geometric (compound) asset class returns. However, standard mean-
variance portfolio optimisation requires return inputs to be provided in arithmetic
rather than in geometric terms. This is because the arithmetic mean of a weighted
sum (e.g., a portfolio) is the weighted sum of the arithmetic means (of portfolio
constituents). This does not hold for geometric returns. Accordingly, we translate
geometric estimates into arithmetic terms. We provide both arithmetic returns and
geometric returns given that the former informs the optimisation process regarding
expected outcomes, while the latter informs the investor about the rate at which
asset classes might be expected to grow wealth over the long run.12
Investment Solutions
Contributors
Alessio de Longis Scott Hixon Marc Shmerling
CFA CFA CFA
Senior Portfolio Manager, Senior Portfolio Manager, Director, Investment
Head of Tactical Asset Head of Research, Research
Allocation, Invesco Invesco Global Asset Invesco Investment
Investment Solutions Allocation Solutions
Greg Chen Chang Hwan Sung Debbie Li
PhD, CFA PhD, CFA, FRM CFA
Senior Analyst Portfolio Manager, Senior Analyst
Solutions Research, APAC
Diane Ellis Yu Li
MS PhD
Macro Research Analyst Quantitative Research
Analyst
Investment Solutions Thought Leadership
Drew Thornton
CFA
Head of Solutions Thought Leadership
Invesco Invesco Investment Solutions is an experienced multi-asset team that seeks to deliver
desired client outcomes using Invesco’s global capabilities, scale and infrastructure.
Investment We partner with you to fully understand your goals and harness strategies across
Invesco’s global spectrum of active, passive, factor and alternative investments that
Solutions address your unique needs. From robust research and analysis to bespoke investment
solutions, our team brings insight and innovation to your portfolio construction
process. Our approach starts with a complete understanding of your needs:
• We help support better investment outcomes by delivering insightful and thorough
analytics.
• By putting analytics into practice, we develop investment approaches specific to
your needs.
• We work as an extension of your team to engage across functions and implement
solutions.
The foundation of the team’s process is the development of capital market
assumptions — long-term forecasts for the behavior of different asset classes. Their
expectations for returns, volatility, and correlation serve as guidelines for long-term,
strategic asset allocation decisions.
Assisting clients in North America, Europe and Asia, Invesco’s Investment Solutions
team consists of over 75 professionals, with 20+ years of experience across the
leadership team. The team benefits from Invesco’s on-the-ground presence
in 25 countries worldwide, with over 150 professionals to support investment
selection and ongoing monitoring.13 Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Invesco Investment Solutions develops CMAs that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 5- and 10-year investment time horizons, are intended to guide these strategic asset class allocations. For each selected asset class, we develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. Estimated returns are subject to uncertainty and error, and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates. Important information The document is intended only for Professional Clients in Continental Europe; for Professional Clients in Dubai, Ireland, the Isle of Man, Jersey and Guernsey, and the UK; for Institutional Investors in Australia; for wholesale investors (as defined in the Financial Markets Conduct Act) in New Zealand; for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan; for Qualified Institutional Investors and/or certain specific institutional investors in Thailand, for certain specific institutional investors in Indonesia and for qualified buyers in Philippines for informational purposes only; for Institutional Investors and/ or Accredited Investors in Singapore; for certain specific Qualified Institutions/ Sophisticated Investors only in Taiwan and for Institutional Investors in the USA. The document is intended only for accredited investors as defined under National Instrument 45-106 in Canada. It is not intended for and should not be distributed to, or relied upon, by the public or retail investors. For the distribution of this document, Continental Europe is defined as Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. By accepting this document, you consent to communicate with us in English, unless you inform us otherwise. This overview contains general information only and does not take into account individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it would be unlawful to market such an offer or solicitation. It does not form part of any prospectus. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations. The opinions expressed are those of Invesco Investment Solutions team and may differ from the opinions of other Invesco investment professionals. Opinions are based upon current market conditions, and are subject to change without notice. Performance, whether actual, estimated, or backtested, is no guarantee of future results. Diversification and asset allocation do not guarantee a profit or eliminate the risk of loss. Unless otherwise stated, all information is sourced from Invesco, in GBP and as of March 31, 2023. Further information is available using the contact details shown overleaf.
14
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• Australia by Invesco Australia Limited (ABN 48 001 693 232), Level 26,
333 Collins Street, Melbourne, Victoria, 3000, Australia, which holds an
Australian Financial Services Licence number 239916.
• Austria and Germany by Invesco Asset Management Deutschland GmbH,
An der Welle 5, 60322 Frankfurt am Main, Germany.
• elgium, Denmark, Finland, France, Greece, Italy, Luxembourg, Norway,
B
Portugal, Spain and Sweden by Invesco Management S.A., President Building,
37A Avenue JF Kennedy, L-1855 Luxembourg, regulated by the Commission de
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333 Collins Street, Melbourne, Victoria, 3000, Australia, which holds an
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Taiwan (0800–045–066). Invesco Taiwan Limited is operated and managed
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T
Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames,
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• The United States of America by Invesco Advisers, Inc., Two Peachtree Pointe,
1555 Peachtree Street, N.W., Suite 1800, Atlanta, Georgia 30309, US.
II-ISCMAGBP-BRO-1-E 05-23 GL2932695Notes
Contact Danielle Singer, CFA Head of North America and EMEA Client Solutions 212 652 4264 Danielle.Singer@invesco.com Peter Miller, CFA Head of Insurance Solutions 617 345 8281 Peter.Miller@invesco.com Telephone calls may be recorded
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